HIGH COURT OF AUSTRALIA
BRENNAN CJ,TOOHEY, GAUDRON, McHUGH AND GUMMOW JJ
NEWCASTLE CITY COUNCIL v GIO GENERAL LIMITED; Matter No S 177/96; NEWCASTLE CITY COUNCIL v GIO GENERAL LIMITED trading as GIO AUSTRALIA; Matter No S 178/96
Insurance - Statutory interpretation
(1997) 191 CLR 85
2 December 1997
Insurance - Statutory interpretation
Insurance—Liability insurance—"Claims made" policy—Notice of facts that might give rise to a claim given to insurer during period of insurance—Claims made on insured after period of insurance had expired—Whether s 40(3) of the Insurance Contracts Act 1984 (Cth) applies to "claims made" policies. Statutory interpretation—Purposive approach—Identification of mischief—Circumstances in which reference can be had to extrinsic material—Resolution of conflict between literal meaning and apparent purpose of statutory provision. Insurance Contracts Act 1984 (Cth), ss 11, 40. Acts Interpretation Act 1901 (Cth), ss 15AA, 15AB.
Orders
Order:
Matter No S 177/96
1. Appeal allowed with costs.
2. Set aside the orders of the Court of Appeal and in lieu thereof order that the appeal to that Court be dismissed with costs, save as to those issues remitted to the Court of Appeal by Order 3 of this Order.
3. Remit the matter to the Court of Appeal to hear and determine whether the appeal from the judgment of Bainton J should be allowed and the declarations made by Bainton J be set aside in so far as those orders are necessary to permit the making of a declaration:
(a) that on or about 18 July 1990 and on or about 23 December 1991, the Appellant gave notice in writing to the Respondent of facts that might give rise to the claim against the Appellant
made by the Newcastle Workers Club as soon as was reasonably practicable after the insured became aware of those facts, so as to comply with s 40(3) of the Insurance Contracts Act 1984 (Cth); and
(b) that the Respondent is not relieved of liability under its policy by reason only of the fact that the claim made by the Appellant in respect of its liability (if any) to the Newcastle Workers Club was made after the expiration of the relevant policy period.
Matter No S 178/96
1. Appeal allowed with costs.
2. Set aside the orders of the Court of Appeal and in lieu thereof order that the appeal to that Court be dismissed with costs.
Decision
BRENNAN CJ
On 28 December 1989, an earthquake struck the city of Newcastle, causing loss of life and damage to property. A coronial inquest into the death of the 12 persons who lost their lives in the earthquake was held. Some had died in the Newcastle Workers' Cooperative Club when the structure of the Club collapsed; others had died or been injured when other structures in the city collapsed. At the inquest, a barrister raised the question whether the appellant ("the Council") was negligent in the manner in which it conducted its building inspection functions. The next day, 18 July 1990, the Newcastle Herald contained anarticle stating, inter alia, that:
"Newcastle City Council had to accept some responsibility for the building collapses at Newcastle Workers Club and Hamilton which resulted in twelve deaths a barrister told the coronial inquest into the Newcastle earthquake deaths yesterday".
Subsequently proceedings were brought in the Supreme Court of New South Wales against the Council by relatives of some of the deceased, by injured persons and by the owners of property damaged in the earthquake claiming damages allegedly caused by the Council's negligence.
The Council seeks indemnity in respect of claims made against it under a policy issued by the respondent ("GIO"). GIO issued the policy for an initial period from 31 January 1989 to 31 December 1989. It was renewed for each of the two following years until 31 December 1991. The terms of the policy provided inter alia:
"GIO will pay to or on behalf of the insured all sums for which the insured shall become legally liable to pay by way of compensation (excluding punitive and exemplary damages) in respect of:
...
(c) Professional Liability
A claim or claims made against the insured during the Period of Insurance arising out of any negligent act, error or omission committed or alleged to have been committed, by the insured in the conduct of the insured's business as specified in the Schedule.
Provided that -
any such claim or claims arising out of any negligent act, error or omission committed or alleged to have been committed prior to 30/6/79 shall be limited to $10 million in the aggregate any one period of insurance."
This was a "claims made" policy, that is to say, the indemnity it provides gives cover in respect of liability for losses that are the subject of claims made on the insured during the policy period. The cover was not limited to losses the subject of claims made on the insured and notified to the insurer (a "claims made and notified" policy). The claims that are the subject of the present proceedings were not made during the policy period; they were made after the last extension of the policy expired.
The policy contained a notification clause[1] in the following terms:
"Notices in writing shall be given as soon as possible to GIO:
(a) of any occurrence, claim, writ, summons or proceedings or of any impending prosecution or inquest, or
(b) of any change materially varying any of the facts or circumstances existing at the commencement of this insurance
that shall come to the knowledge of the insured. Such notice shall be given by the insured whose knowledge shall be deemed to include the knowledge of any person whose knowledge would in law be that of the insured."
Following the report in the Newcastle Herald of 18 July 1990, the Council sent a facsimile copy of the article to the GIO under cover of a note reading:
"Potential PI claim against Council re earthquake damage to Newcastle Workers Club.
I forward extract from Newcastle Herald of this date (18th inst) which is self-explanatory and for your information only at this time.
Should there be any further developments in this regard I will keep you informed."
Four further letters were sent on 23 December 1991 alerting GIO to the possibility of claims against the Council as a result of the earthquake.
GIO denied the Council's right to an indemnity in respect of claims made on the Council outside the policy period. The Council, relying on the fact that it had given GIO notice in writing within the policy period of facts that might give rise to a claim against the Council, invokes s 40(3) of the Insurance Contracts Act 1984 (Cth) ("the Act") to sheet home liability to GIO. That provision applies to contracts of liability insurance within the meaning of that term in s 11(7) of the Act[2]. The policy issued by GIO answers that description.
Section 40 of the Act reads as follows:
" (1) This section applies in relation to a contract of liability insurance the effect of which is that the insurer's liability is excluded or limited by reason that notice of a claim against the insured in respect of a loss suffered by some other person is not given to the insurer before the expiration of the period of the insurance cover provided by the contract.Section 40 is concerned with the giving of notice by an insured to an insurer of claims in respect of which the insurer is or may be liable to indemnify the insured. Before the Act came into force, insurers who sought to protect themselves entirely against practical and actuarial problems caused by late notification of claims could write policies which were expressed to exclude liability in the event of non-notification during the policy period. Sub-section (1) fastens on policies containing such exclusions[3]. The policies which sub-s (1) identifies by reference to their effect are the class of contracts to which sub-s (2) applies. That sub-section imposes on the insurer duties to inform a prospective insured of the matters therein referred to. Paragraph (a) of sub-s (2) requires the giving of written information by an insurer to a prospective insured as to the statutory alteration in an insured's rights that is worked by sub-s (3). Where the terms of a policy would exclude liability for non-notification of a claim within the policy period, the insured must be informed of his entitlement to the protection of sub-s (3) "before the contract is entered into". Failure so to inform the prospective insured is visited with a penalty.
(2) The insurer shall, before the contract is entered into:
(a) clearly inform the insured in writing of the effect of subsection (3); and
(b) if the contract does not provide insurance cover in relation to events that occurred before the contract was entered into, clearly inform the insured in writing that the contract does not provide such cover.
Penalty: $5,000.
(3) Where the insured gave notice in writing to the insurer of facts that might give rise to a claim against the insured as soon as was reasonably practicable after the insured became aware of those facts but before the insurance cover provided by the contract expired, the insurer is not relieved of liability under the contract in respect of the claim, when made, by reason only that it was made after the expiration of the period of the insurance cover provided by the contract."
Although sub-s (1) is expressed as a definition of the class of contracts to which the whole of s 40 applies[4], a literal interpretation of sub-ss (1) and (3) produces absurdity. If a policy relieves an insurer of liability "by reason that notice of a claim [was] not given to the insurer" within the policy period (sub-s (1)), it is difficult to see how sub-s (3) could be of assistance to an insured on whom a claim is made outside the policy period. If sub-s (3) is interpreted as referring to the contractually expressed reason why the insurer would be relieved of liability in respect of a claim made outside the policy period, that reason would not be "only" that the claim was made outside the period (sub-s (3)); the reason, or a reason, would be the absence of a notice of claim during the policy period. Therefore, if sub-s (3) applies only to policies prescribed by sub-s (1) and if sub-s (3) is interpreted as referring to a contractual exclusion of liability, sub-s (3) would fail in its purpose. An unqualified literal interpretation of sub-s (1) and sub-s (3) would leave sub-s (3) no room for operation. Some qualification is needed to permit both sub-ss (1) and (3) room for operation.
Sub-section (1) is definitional; sub-ss (2) and (3) are operational. The operational sub-sections disclose the purposes of the section. Section 40 is designed to achieve two purposes: first, to ensure that a prospective insured who proposes to enter into a policy containing an exclusion of the kind referred to in sub-s (1) is given the information prescribed by sub-s (2); and, secondly, to impose on the insurer a liability in respect of claims made on an insured provided that (a) the insured gave a notice complying with sub-s (3) within the policy period and (b) the insurer would be liable but for ("by reason only") the making of the claim after the policy period has expired. Sub-section (2)(a) provides that, although a proposed contract prescribes notice of a claim within the policy period as a condition of the insurer's liability (a claims made and notified policy) (sub-s (1)), the insurer must inform the prospective insured (sub-s (2)) of the protection available under sub-s (3). What protection is available under sub-s (3)?
The protection available under sub-s (3) is subject to two conditions. The first condition is the giving of the notice therein mentioned within the policy period. That is a question of fact. The second condition is that, sub-s (3) apart, the insurer would not be liable "by reason only" that the claim was made outside the policy period. As pointed out above, if this condition is taken to refer to a condition expressed in the contract, sub-s (3) would be sterilised in its application to a claims made and notified policy. In that event, the obligation on the insurer to give to a prospective insured under a claims made and notified policy the information prescribed by sub-s (2)(a) would be misleading. The second condition in sub-s (3) must be taken to refer not to a contractual condition but to the necessary consequence that would follow from the fact that a claim is made outside the policy period. If, sub-s (3) apart, the fact that a claim is made outside the policy period means that the insurer must be relieved of liability, the second condition of sub-s (3) is satisfied. Although the words "by reason that" in sub-s (1) introduce a description of the terms of the contract which have "the effect" therein stated, the words "by reason only" in sub-s (3) introduce a description of an event which would in practice preclude the attachment of liability to the insurer under the contract.
Sub-section (3) imposes a liability where no contractual liability exists. The conditions on which statutory liability is imposed on an insurer under sub-s (3) are satisfied by proof of two facts and one contractual consequence. The facts are the giving of a notice within the policy period of facts that might give rise to a claim and the making of the claim outside the policy period. The contractual consequence is that the making of the claim outside the policy period necessarily results in the relief of the insurer from liability. As a practical matter, the making of a claim outside the policy period would relieve the insurer of liability under either a claims made and notified policy or a claims made policy. Is the operation of sub-s (3) restricted by sub-s (1) to claims made and notified policies or do the terms of sub-s (3), construed as I have indicated, apply generally?
The resolution of that question is not assisted, in my respectful opinion, by reference to the Explanatory Memorandum laid before the Parliament when the Bill for the Act was debated[5]. The answer is indicated by reference to the purposes of the Act indicated by its preamble:
"An Act to reform and modernise the law relating to certain contracts of insurance so that a fair balance is struck between the interests of insurers, insureds and other members of the public and so that the provisions included in such contracts, and the practices of insurers in relation to such contracts, operate fairly, and for related purposes."
The Act alters the balance of interests to ensure a fair operation of the relationships between insurers, insureds and other members of the public. It does so chiefly by statutory modification of contractual relations. Section 40 addresses the problem of the notification of claims. Sub-section (3) substitutes a statutory notice condition for any contractual condition of the kind referred to in sub-s (1). Under policies of the kind referred to in sub-s (1), an insurer was liable for claims made on an insured during a policy period provided notice of the claim was given within that period. But where the interests of the insurer are protected by a notice as prescribed by sub-s (3), it is to be liable for claims made outside the policy period. Provided the insurer's interest is so protected, there is no ground consistent with the preamble for distinguishing between an insurer's liability under a claims made and notified policy and its liability under a claims made policy. The balance struck between the insurer and the insured by sub-s (3) is the same, whether the policy be a claims made and notified policy or a claims made policy.
This consideration militates against a reading down of sub-s (3) so as to restrict its operation to claims made and notified policies. I would construe it as operating whenever the facts satisfy the prescribed conditions of its operation and the necessary consequence of the making of a claim outside the policy period would be the relief of the insurer from liability.
As the condition on which sub-s (3) operates is that the insurer would have been relieved of liability "by reason only that [the claim] was made" outside the policy period, it has no application where the claim is in fact made inside the policy period. Sub-section (3) is not needed in such a case if the policy is a claims made policy. If the policy be a claims made and notified policy and a claim is made on an insured during the policy period but the insured fails to give a notice of the claim to the insurer during that period, sub-s (3) has no application.
This interpretation of s 40 would apply the definitional provisions of sub-s (1) only to sub-s (2), giving sub-s (3) the operation prescribed by its text without the limitation that would follow if sub-s (1) governed the operation of sub-s (3). So to hold is to read down the general introductory words of sub-s (1): "This section applies in relation to ...". But, as Mason and Wilson JJ said in Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation[6]:
"there are cases in which inconvenience of result or improbability of result assists the court in concluding that an alternative construction which is reasonably open is to be preferred to the literal meaning because the alternative interpretation more closely conforms to the legislative intent discernible from other provisions in the statute."
In my opinion, the introductory words of sub-s (1) should not be read literally so as to govern sub-s (3) though it defines the policies to which sub-s (2) relates.
It follows that the Council is entitled to rely on s 40(3) to sheet home liability to GIO under the policy. The Court of Appeal of New South Wales held to the contrary. Therefore the appeals to this Court must be allowed. In No S177 of 1996, Order 2 of the orders made by the Court of Appeal should be set aside and in lieu thereof the appeal to that Court should be dismissed with costs. In No S178 of 1996, the orders of the Court of Appeal should be set aside. However, the appeal from the orders of Bainton J to that Court raised issues which will require further consideration in the light of the reasons for judgment of this Court. For that reason, the matter must be remitted to the Court of Appeal to hear and determine the issues raised by the notice of appeal to that Court and to make such order as that Court may determine in the light of the reasons for judgment of this Court.
TOOHEY, GAUDRON AND GUMMOW JJ These appeals are brought from the New South Wales Court of Appeal[7] which allowed two appeals which had been heard together. The appeals were against declaratory relief granted by different judges (O'Keefe CJ at Comm D and Bainton J) sitting in the Commercial Division of the Supreme Court of New South Wales in separate proceedings, both of which related to the liability of the present respondent ("GIO") to the present appellant ("the Council") in respect of a policy of insurance issued by GIO to the Council[8].
Various issues were litigated in the Commercial Division and in the Court of Appeal. In this Court, the grant of special leave was limited to the issue concerning the construction of s 40 of the Insurance Contracts Act 1984 (Cth) ("the Act"). It will be convenient to set out the text of this provision after shortly detailing the facts. They are not in dispute.
By a policy dated 15 December 1989 ("the Policy"), GIO insured the Council against certain risks in respect of a period of insurance from 31 January 1989 to 4.00 pm on 31 December 1989. In the Schedule to the Policy, the business of the insured was identified as "City Council undertaking all activities authorised by the Local Government Act, 1919 excluding electricity undertakings". The Policy was renewed for periods ending 31 December 1990 and 31 December 1991, but not for any period thereafter.
On 28 December 1989, during the first period of currency of the Policy, an earthquake occurred in Newcastle causing death, personal injury and serious damage to property. The property which was badly damaged included the premises owned and occupied by the Newcastle Workers Co-operative Club Ltd ("the Club"). Further, certain persons who were in or near the premises at the time of the earthquake were killed and others were injured.
The claims with which this appeal is concerned were made by third parties against the Council after 31 December 1991, the day on which the period of insurance under the second renewal of the Policy expired. In general terms, they alleged that the Council had been negligent in the manner in which it conducted its statutory building inspection and plan approval functions. The Council sought indemnity from GIO with respect to these claims but GIO denied liability under the Policy.
Further, on 8 December 1994, the Club commenced a proceeding in the Supreme Court of New South Wales against the Council seeking damages for the loss of its premises at the time of the earthquake. GIO also denied liability to indemnify the Council in respect of that claim.
The Policy was headed "BROAD FORM LIABILITY INSURANCE". In it GIO undertook to pay to the Council all sums for which the Council became legally liable to pay by way of compensation (excluding punitive and exemplary damages) in respect of "(a) Public Liability ...", and "(b) Products Liability ...", in each case happening during the period of insurance and caused by an occurrence in connection with the business of the Council. GIO also undertook liability under a third head, in the following terms:
"(c) Professional Liability
A claim or claims made against the insured during the Period of Insurance arising out of any negligent act, error or omission committed or alleged to have been committed, by the insured in the conduct of the insured's business as specified in the Schedule." This was accompanied by a proviso which is not of present significance.
It should be noted that the contract was to provide indemnity in respect of claims made against the Council during the period of insurance, without any temporal stipulation as to the occurrence of the relevant negligent act, error or omission by the Council. The obligation of GIO was identified by reference to the making of the claim upon the Council during the currency of the Policy, whether or not the relevant "negligent act, error or omission" also occurred within that period. Such provisions have been common in professional liability policies[9] and the expression "claims made" is used in relation to the policies involved[10].
As we outlined above, all of the claims made against the Council, in respect of which GIO denies an obligation under the Policy to provide indemnity, were made after the expiry of the period of insurance. It is accepted that the claims were of a kind which otherwise would fall within provision (c). However, the fact that the claims were made by third parties upon the insured after the period of insurance has the result that, on its face, the Policy did not oblige GIO to indemnify the Council in respect of those claims.
Given the nature of the risks, particularly in professional liability policies, a significant period may elapse between a relevant occurrence and the making of a claim upon the insured. To meet that situation, a "claims made" policy may provide for an extension of cover to claims which are made upon the insured after the period of insurance but which arise out of an occurrence which was notified by the insured to the insurer within the period of cover[11]. By such a provision the insurer is assisted by notification whilst the policy is current and the cover of the insured is not left to depend upon whether the third party makes the claim upon the insured during or after the period of insurance. The Policy did not provide for any such further cover. The Council seeks in this litigation to utilise s 40 of the Act to achieve a result which it would have obtained had it contracted for this broader cover.
The Policy contained a section headed "CONDITIONS". Condition 3 was in the following terms:
"Notices in writing shall be given as soon as possible to GIO:In July 1990, during the currency of the first renewal of the Policy, the Council complied with condition 3. It sent to GIO a newspaper report dated 18 July 1990 of proceedings of a coronial inquest into certain deaths which had resulted from the earthquake. Counsel appearing at the inquest for the family of one of the persons who had been killed submitted that the Council had to accept some responsibility for the collapse of the Club's premises because it had not inspected the building properly. The Council further communicated with GIO by letters sent on 23 December 1991.
(a) of any occurrence, claim, writ, summons or proceedings or of any impending prosecution or inquest, or
(b) of any change materially varying any of the facts or circumstances existing at the commencement of this insurance
that shall come to the knowledge of the insured. Such notice shall be given by the insured whose knowledge shall be deemed to include the knowledge of any person whose knowledge would in law be that of the insured."
However, the circumstance that the Council had, during the currency of the Policy, given to GIO written notice as required by condition 3 did not supplement the risk for which GIO had contracted. Of itself, condition 3 did not expand the obligation of GIO beyond the provision of indemnity in respect of claims made against the Council during the period of insurance. Rather, a provision such as condition 3 serves the purposes of the insurer, enabling it to commence investigations early and to take steps to obviate future liability[12].
It is here that s 40 becomes of critical importance to the Council. The Council submits that, upon its true construction, s 40 so applies to the present facts such that, the Council having given notification of the facts during the period of the insurance, GIO cannot rest its denial of liability upon the ground that, when the claims were made upon the Council by the Club and the other third parties, the period of the insurance had expired. The Court of Appeal concluded that s 40 did not have the operation for which the Council contends.
Section 40 applies "in relation to a contract of liability insurance". For the purposes of the Act, "a contract of liability insurance is a contract of general insurance that provides insurance cover in respect of the insured's liability for loss or damage caused to a person who is not the insured" (s 11(7)). A contract of general insurance is a contract of insurance which is not a contract of life insurance (s 11(6)). The Policy was a contract of liability insurance within the meaning of the Act.
Section 40 states:
"(1) This section applies in relation to a contract of liability insurance the effect of which is that the insurer's liability is excluded or limited by reason that notice of a claim against the insured in respect of a loss suffered by some other person is not given to the insurer before the expiration of the period of the insurance cover provided by the contract.
(2) The insurer shall, before the contract is entered into:
(a) clearly inform the insured in writing of the effect of subsection (3); and
(b) if the contract does not provide insurance cover in relation to events that occurred before the contract was entered into, clearly inform the insured in writing that the contract does not provide such cover.
Penalty: 300 penalty units[13].
(3) Where the insured gave notice in writing to the insurer of facts that might give rise to a claim against the insured as soon as was reasonably practicable after the insured became aware of those facts but before the insurance cover provided by the contract expired, the insurer is not relieved of liability under the contract in respect of the claim, when made, by reason only that it was made after the expiration of the period of the insurance cover provided by the contract."
In the interpretation of s 40, the Court may consider the Explanatory Memorandum relating to the Insurance Contracts Bill 1984 which was laid before the House of Representatives by the responsible Minister. The common law, independently of s 15AB of the Acts Interpretation Act 1901 (Cth) ("the Interpretation Act"), permits the Court to do so in order to ascertain the mischief which the statute was intended to cure[14].
Paragraphs 126-128 of the Explanatory Memorandum disclose the particular mischiefs which cl 40 of the Bill was designed to remedy. The relevant portion is as follows:The reference in the Explanatory Memorandum to "ALRC" is to Report No 20 of the Law Reform Commission, Insurance Contracts, which had been delivered in 1982 ("the Report")[15]. Paragraph 265 of the Report in part reads as follows:
"Clause 40 - Certain contracts of liability insurance
126 Present Law - Insurance may be taken out against various forms of legal liability which the insured may incur to third parties eg professional indemnity insurance, public liability insurance in respect of liabilities in connection with particular buildings and employer's liability insurance. The contract is one of indemnity and no obligation arises on the part of the insurer until the insured has suffered a loss. Professional indemnity policies often contain a clause covering claims made after the period of the insurance provided they arise out of an occurrence notified to the insurer within the period of cover. Some contracts of liability insurance apply to claims made during the period of cover rather than to events which occurred during that period. Thus an insurer may be entitled to refuse a claim made after the expiration of the cover even though it was made in respect of an event occurring within the period and the facts were notified to the insurer.
127 Proposed Law - Clause 40 applies to contracts which exclude or limit an insurer's liability because notice of the insured's claim is not given before the expiration of the period of the cover (clause 40(1)). Provided the insured gave the insurer written notice as soon as reasonably practicable of the facts giving rise to the claim and did so before the cover expired, the insurer will not be relieved of liability merely because the claim is made after the expiration of the cover (clause 40(3)) (ALRC para 265).
128 Furthermore, clause 40 will require the insurer, before the contract is entered into:
. to give the insured written notice of the effect of clause 40(3); and
. if the contract does not provide cover for events occurring before the contract was entered into, to give the insured written notice that the contract does not provide such cover.
The penalty for failure to do so is $5,000 - clause 40(2) (ALRC para 43-45 and 265)." (emphasis added)
"Professional indemnity policies often contain a clause covering claims made after the period of insurance provided they arise out of an occurrence notified to the insurer within the period of cover. Extensions are also available to cover claims made within the period of cover in respect of occurrences before the commencement of that period, unless covered by a preceding insurance. Consequently, the Commission suggested that insurers should be required to include in their policies a clause covering claims made outside the period of cover provided they arose out of occurrences notified within the period of cover."This case is not concerned with the remedial steps outlined in par 128 of the Explanatory Memorandum. In particular, the Policy did not restrict the provision of cover to events occurring after the entry into the contract. It is concerned with the matter in par 127.
It will be apparent from the terms of par 127 that the phrase "contracts which exclude or limit an insurer's liability" (which in substance is repeated in s 40(1)) was used in the sense of "the insurer may be entitled to refuse a claim".
Appendix A to the Report contained a draft Insurance Contracts Bill to implement the recommendations of the Report. Clause 41 thereof was expressed in terms relevantly indistinguishable from what became cl 40 referred to in the Explanatory Memorandum and s 40 of the Act. The Summary of Recommendations to the Report identified the objectives sought to be achieved by cl 41 of the draft Bill and Appendix A. Paragraph 48 of the Summary was in the following terms:
"Liability Insurance. Some forms of liability insurance (eg professional indemnity insurance) apply to claims made against the insured within the period of cover rather than to events which occurred within that period. In some cases, the contract also covers claims made after the period of insurance provided they arise out of an occurrence notified to the insurer within the period of cover. Legislation should make additional cover of this type mandatory. In addition, the insurer should be required clearly to advise the insured of this additional benefit. Extensions to cover of this type are also available for claims made within the period of cover in respect of occurrences before the commencement of that period, unless covered by a preceding insurance. An insurer should be required to draw the attention of a proposed insured to the availability of retroactive cover of this type (para 265, cl 41)." (emphasis added)From these materials there appear several matters of importance for this case. First, s 40 is not a provision which, within the legislature, was the result of a compromise between contending factions or interest groups which involved terms and understandings not readily to be made apparent to a court seeking to discern the legislative intent[16]. Rather, the legislation was the sequel to consideration by the body which produced the Report and the outcome of that consideration was detailed in the Report itself.
Clause 41(2)(b) of the draft Bill in the Report concluded with the words "clearly inform the insured in writing that the insured may be able to obtain such cover under another contract with the insurer or with some other insurer". Section 40(2)(b) of the Act concludes "clearly inform the insured in writing that the contract does not provide such cover". But, in all other respects, in enacting s 40 the legislature adopted the recommendations in the Report.
Secondly, the Report and the Explanatory Memorandum disclose the several and particular shortcomings in the existing law which s 40 was designed to provide a remedy. This litigation is concerned with that mischief disclosed in the emphasised passages in the above extracts from these materials. Section 40(1) identifies the situations for which a remedy is provided by s 40(2)(a) and s 40(3). In addition, if the contract in question also gives the restrictive cover identified in s 40(2)(b), there is imposed upon the insurer the obligation so to inform the insured before the contract is entered into. As we have indicated, par (b) had no application to the Policy issued by the Council.
The mischief with which this case is concerned arises in circumstances in which the events giving rise to a claim on the insured might occur within the period of cover and the occurrence might be notified to the insurer within that period. If the claim on the insured were made within the period of cover, the terms of the policy might render the insurer liable to meet it. Yet those terms might be such as to deny additional cover where, in what otherwise were the same circumstances, the claim was made after the period stipulated in the policy as that within which claims were to be made. In some cases, the contract of insurance itself provided for this additional cover. In a case such as this one, where the contract made no such provision, this state of affairs was to be remedied by legislation, making the additional cover mandatory. Paragraph 48 of the Summary of Recommendations in the Report had made this objective plain.
Counsel for GIO submitted that "claims made" policies stood outside s 40(1). In the present case, no claim had been made upon the Council within the currency of the Policy so that, within the terms of s 40(1), there was no liability of GIO which otherwise existed and was excluded or limited by reason of any matter. The submission continued that s 40(1) would apply to a "claims made and notified" policy, a category of policy which now, at any rate, is frequently encountered[17]. A "claims made and notified" policy requires, as a condition of liability of the insurer, that the claim be made against the insured and notified to the insurer during the period of cover.
The evidence which was before the Supreme Court and the Court of Appeal did not disclose whether "claims made and notified" policies were in use when the Report was prepared[18]. However, the Report and the Explanatory Memorandum in terms are addressed to perceived inadequacies in "claims made" policies. Indeed, if s 40 "is read in the light of the mischief which it was designed to overcome and the objects of the legislation, it wears a very different appearance"[19] to that presented to a reader who has not been so informed. The opening phrase in s 40(1), "[t]his section applies", indicates that it is an introductory provision which discloses the purpose of what follows[20]. Expressions in s 40(1) such as "the insurer's liability", and "excluded or limited" have the sense given them in the Report and the Explanatory Memorandum. They, and the term "the effect", are not to be construed narrowly or with undue technicality[21]. It is true, as counsel for GIO stressed, that s 40(2) creates an offence and that "the contract" to which it refers is one answering the description in s 40(1). However, s 40(2) casts an obligation upon the insurer, in aid of remedial measures passed for the protection of those dealing with insurers. In such a context, the rule of strict construction of penal provisions is one of last resort[22].
The opening words of s 40(1) identify a contract or policy of liability insurance the provisions of which operate in a given case to produce a stipulated outcome or "effect". This is that, a certain event not having occurred (notice of a claim not having been given to the insurer during the currency of the policy), the insurer is entitled to refuse the claim (so that its liability is "excluded or limited"), whereas if the event had occurred the insurer would have been liable to the insured.
In the present case, GIO would have been liable if notice of the claims against the Council could have and had been given to GIO before cover expired on 31 December 1991. The earthquake which gave rise to the claims occurred during the period of cover. However, the Policy fixed upon claims made against the Council within the period of cover rather than upon claims made then or later, but in respect of events within the period of cover. Accordingly, the Policy was a contract of liability insurance to which s 40 applied so as to extend to the Policy the additional mandatory cover which the section specifies in sub-s (3).
The effect of s 40(3) was, upon satisfaction by the Council of a condition specified in s 40(3), to make it no answer by GIO to the indemnity sought by the Council in respect of the claims made against the Council after 31 December 1991 that this was after the expiration of the period of insurance cover provided by the Policy. The condition specified in s 40(3) was that the Council had given "notice in writing to the insurer of facts that might give rise to a claim against [it]", and that it had done so "as soon as was reasonably practicable after [it] became aware of those facts but before the insurance cover provided by the contract expired". This condition was satisfied by the steps taken by the Council at the time of the coronial inquest and in compliance with its obligations under condition 3 of the Policy.
The appeals to this Court should be allowed with costs. The orders of the Court of Appeal allowing the appeal from O'Keefe CJ at Comm D should be set aside and that appeal should be dismissed. The orders of the Court of Appeal which dealt with the appeal from Bainton J may require further consideration. It was submitted to this Court that, even if the appeal succeeded, the declarations made by Bainton J would require amendment. This Court should not deal with that aspect of the matter. The matter should be remitted to the Court of Appeal to be dealt with in accordance with the decision of this Court and upon such further consideration as it may be advised.
McHUGH J
The question in these appeals is whether the appellant ("the Council") can rely on s 40(3) of the Insurance Contracts Act 1984 (Cth) ("the Act") so as to require the respondent ("GIO") to indemnify it for claims made against the Council after the relevant period of insurance cover had expired, but which the Council anticipated and, as a result, gave notice to GIO before that period expired.
Section 40
Section 40 of the Act is entitled "Certain contracts of liability insurance" and provides:
"(1) This section applies in relation to a contract of liability insurance the effect of which is that the insurer's liability is excluded or limited by reason that notice of a claim against the insured in respect of a loss suffered by some other person is not given to the insurer before the expiration of the period of the insurance cover provided by the contract.
(2) The insurer shall, before the contract is entered into:
(a) clearly inform the insured in writing of the effect of subsection (3); and
(b) if the contract does not provide insurance cover in relation to events that occurred before the contract was entered into, clearly inform the insured in writing that the contract does not provide such cover.
Penalty: 300 penalty units[23].
(3) Where the insured gave notice in writing to the insurer of facts that might give rise to a claim against the insured as soon as was reasonably practicable after the insured became aware of those facts but before the insurance cover provided by the contract expired, the insurer is not relieved of liability under the contract in respect of the claim, when made, by reason only that it was made after the expiration of the period of insurance cover provided by the contract." Section 11(7) defines a "contract of liability insurance" as being:
"a contract of general insurance that provides insurance cover in respect of the insured's liability for loss or damage caused to a person who is not the insured."The appeals are brought against orders of the Court of Appeal of the Supreme Court of New South Wales allowing appeals against orders of the Commercial Division of the Supreme Court. The Court of Appeal (Kirby P, Sheller and Powell JJA) held that GIO was not liable to indemnify the Council.
In my opinion, the appeals should be allowed.
The insurance policy
For the period between 31 January 1989 to 31 December 1991, which included two renewals, the Council was insured with GIO under Policy Number PL3300104 ("the policy"). Under the description "Broad Form Liability Insurance" and the heading "Liability Coverage", the policy provided:
"GIO will pay to or on behalf of the insured all sums for which the insured shall become legally liable to pay by way of compensation (excluding punitive and exemplary damages) in respect of:
...
(c) Professional Liability A claim or claims made against the insured during the Period of Insurance arising out of any negligent act, error or omission committed or alleged to have been committed, by the insured in the conduct of the insured's business as specified in the Schedule."
The limit of the indemnity was $20,000,000 in total for any one period of insurance. Under the heading of "Notices", Condition 3 of the policy stated:
"Notices in writing shall be given as soon as possible to GIO:The policy issued to the Council is commonly described as a "claims made" policy, a policy which, in its terms, provides coverage only for claims which are made by the insured within the period of cover. It is to be distinguished from a "claims made and notified" policy which, in its terms, provides coverage only for claims which are both made and notified to the insured within the period of cover. These two forms of policy can be further distinguished from "occurrence basis" policies which, broadly speaking, provide coverage for the insured's liability in respect of defined events occurring within the period of cover notwithstanding that the claim may not be made until some later time.
(a) of any occurrence, claim, writ, summons or proceedings or of any impending prosecution or inquest, or
(b) of any change materially varying any of the facts or circumstances existing at the commencement of this insurance
that shall come to the knowledge of the insured. Such notice shall be given by the insured whose knowledge shall be deemed to include the knowledge of any person whose knowledge would in law be that of the insured."
The Newcastle Earthquake
On 28 December 1989, an earthquake rocked Newcastle resulting in death or personal injury to a large number of people and significant property damage. Much of the injury and damage centred on the Newcastle Workers Club and the suburb of Hamilton.
On 18 July 1990 an article on the front page of the Newcastle Herald reported comments made by the late Mr Paul Kerr, a barrister appearing at a coronial inquest into the deaths of persons killed in the earthquake. Mr Kerr was reported as submitting that the Council had to accept some responsibility for the collapse of buildings during the earthquake. One of the buildings was the Newcastle Workers Club. He alleged that the Council had been negligent in inspecting and certifying the structural soundness of the Club. The Council faxed a copy of the article to its insurance brokers in order to give GIO notice of possible claims against the Council. Further correspondence from the Council in December 1991 again alerted GIO to the possibility of legal claims being made against the Council arising from the earthquake.
After the period of insurance under the policy expired on 31 December 1991, the Council received a number of claims for compensation for personal injury and property damage. GIO denied that it was liable to indemnify the Council in respect of these claims.
The decision of O'Keefe CJ Comm Div
Subsequently, the Council brought proceedings in the Commercial Division of the Supreme Court of New South Wales seeking a declaration that GIO was liable to indemnify the Council under the policy in respect of a number of personal injury claims. O'Keefe CJ Comm Div who heard the matter held that the required notice had been given in accordance with Condition 3 of the policy and that s 40(3) of the Act required GIO to indemnify the Council[24]. His Honour said that s 40(3) was intended to protect an insured "from falling between two policies"[25] and should be given a plain reading.
The decision of Bainton J
The Council also sought a declaration in the Supreme Court of New South Wales to the effect that GIO was liable to indemnify the Council under the policy in respect of a property damage claim brought against the Council by the Newcastle Workers Club. Bainton J heard the matter and held that the judgment of O'Keefe CJ Comm Div on the applicability of s 40(3) to insuring cl (c) gave rise to an issue estoppel in the Council's favour - a point which was conceded by GIO[26].
Bainton J had "great difficulty", however, in seeing how s 40(3) applied to the policy, given the requirement of s 40(1) that the contract must be one "the effect of which is that the insurer's liability is excluded or limited by reason that notice of a claim ... is not given to the insurer before the expiration of the period of the insurance cover provided by the contract"[27]. His Honour held that, even if s 40(1) presented no obstacle, s 40(3) would not apply. This was because it could not be said that GIO would otherwise be "relieved from liability" under the policy in respect of a claim made after the expiration of the period of cover "by reason only that it was made after the expiration of the period of insurance cover provided by the contract." The policy provided cover only for claims made during the period of insurance and not for claims made after that period. On this view, GIO was not in any way "relieved of liability" by a claim made outside the period of insurance because there was no liability to begin with.
It is clear that, but for the issue estoppel, Bainton J would have held that s 40 did not apply to the policy.
The decision of the New South Wales Court of Appeal
GIO appealed to the New South Wales Court of Appeal against the judgments of O'Keefe CJ Comm Div and Bainton J.
Like the present appeal to this Court, GIO's appeal to the Court of Appeal was substantially against the decision of Bainton J. The matter which O'Keefe CJ Comm Div heard has been settled. The appeal against his judgment is brought only to prevent his Honour's finding further operating as an issue estoppel. GIO seeks to have O'Keefe CJ Comm Div's decision formally reversed but undertakes not to disturb the settlement.
The Court of Appeal allowed GIO's appeals[28]. The principal judgment was delivered by Kirby P, with whom Sheller and Powell JJA relevantly agreed. Kirby P said that although s 40(1) applies beyond "claims made and notified" policies, it at least requires that a provision requiring notification of claims be a condition precedent to the insurer's liability to indemnify. The present policy contained no such condition precedent. It was purely a "claims made" policy. Accordingly, s 40(1) and (3) did not apply.
The arguments supporting the application of s 40(1) and (3)
Mr Sackar QC, for the Council, advances two reasons for applying s 40(1) and consequently s 40(3) to the policy. First, he contends that s 40(1) applies beyond a "claims made and notified" policy to encompass a "claims made" policy because no notice of a claim could be given where no claim was made under the policy during the period of cover. He argues that the "effect" of this absence of notice of a claim therefore is to "exclude or limit" the insurer's liability within the meaning of s 40(1). Second, he contends that the relevant extrinsic material shows that the protection afforded by the legislative reform ultimately enacted in s 40(3) was intended to be available for persons insured under "claims made" policies. The Court of Appeal, Mr Sackar says, failed to apply a purposive approach to statutory interpretation and failed to take into account the perceived evil that required legislative reform.
In response, Mr Rayment QC, for GIO, relies on the reasons given by the Court of Appeal. He also points to the penal provision of s 40(2) as reason to construe s 40(1) in a strict fashion. Although Mr Rayment does not concede that GIO is necessarily liable under s 40(3) if the policy was within the scope of s 40(1), the main point of controversy between the parties is whether the terms of s 40(1) prevent s 40(3) from applying to the policy.
Section 40(1) is not an "introductory" provision having no legal effect
Before dealing with Mr Sackar's principal argument, I must refer to a further argument that Mr Sackar relied on as the result of a suggestion that I made to him during the course of argument. I suggested to Mr Sackar that perhaps s 40(1) was merely an "introductory" provision which attempts only to summarise the effect of s 40 and that it has no independent legal effect. I referred him to Dedousis v Water Board[29] where this Court held that s 60F of the Limitation Act 1969 (NSW) was no more than an introductory provision and had no substantive legal effect. Section 60F provided:
"The purpose of this Subdivision is to provide a procedure for a further discretionary extension of limitation periods where the plaintiff was unaware of the fact, nature, extent or cause of the injury, disease or impairment at the relevant time. This procedure is available for causes of action accruing on or after 1 September 1990, and also (by the operation of Schedule 5) for causes of action that accrued before that date."In Dedousis, the Court held that, in referring to the requirement that the plaintiff was "unaware of the fact, nature, extent or cause of the injury ... at the relevant time", s 60F was merely summarising the provisions of s 60I(1)(a) which needed to be satisfied before an order could be made under s 60G. Section 60F did not of itself purport to confine the cases in which an extension of the statutory limitation period could be granted.
Mr Sackar adopted my suggestion as part of his argument. However, on reflection, I think that reliance on the Court's reasoning in Dedousis is misplaced. Section 40(1) is quite different from s 60F of the Limitation Act 1969 (NSW). Section 40(1) makes no attempt to summarise the purpose or effect of s 40(2) and (3). Rather, with the assistance of s 11(7), s 40(1) defines the types of policies to which s 40(2) and (3) applies.
A purposive approach should be adopted in construing s 40
A purposive approach should be adopted in construing s 40. Section 15AA(1) of the Acts Interpretation Act 1901 (Cth), which is entitled "Regard to be had to purpose or object of Act", provides:
"In the interpretation of a provision of an Act, a construction that would promote the purpose or object underlying the Act (whether that purpose or object is expressly stated in the Act or not) shall be preferred to a construction that would not promote that purpose or object."
Accordingly so far as possible, the Court should adopt a construction of s 40 which promotes the purpose of the Act.
The preamble to the Act indicates some of its objects when it describes the statute as:
"An Act to reform and modernise the law relating to certain contracts of insurance so that a fair balance is struck between the interests of insurers, insureds and other members of the public and so that the provisions included in such contracts, and the practices of insurers in relation to such contracts, operate fairly, and for related purposes".
Moreover, as the extrinsic material reveals, s 40(3) was intended to be remedial. As far as practicable, s 40(1) and (3) should be construed to promote the objects of the Act. Nevertheless, as I pointed out in Kingston v Keprose Pty Ltd[30],in applying a purposive construction, "the function of the court remains one of construction and not legislation." When the express words of a legislative provision are reasonably capable of only one construction and neither the purpose of the provision nor any other provision in the legislation throws doubt on that construction, a court cannot ignore it and substitute a different construction because it furthers the objects of the legislation.
GIO contends that it would be wrong to give a purposive approach to s 40 because s 40(2) is a penal provision. However, if any conflict arises from the operation of the two rules of construction, the strict construction rule cannot prevent the words of the section from being given their fair meaning. In Waugh v Kippen[31], Gibbs CJ, Mason, Wilson and Dawson JJ said:
"In the course of argument, the question arose whether the two principles of interpretation to which we have referred [ie a purposive interpretation which furthered industrial safety and the rule that penal provisions should be strictly construed] come into conflict in the present case and if so, how the conflict is to be resolved. If such a conflict was to arise, the court must proceed with its primary task of extracting the intention of the legislature from the fair meaning of [the] words by which it has expressed that intention, remembering that it is a remedial measure passed for the protection of the worker. It should not be construed so strictly as to deprive the worker of the protection which Parliament intended that he should have ... In such a context the strict construction rule is indeed one of last resort."
The relevant extrinsic material
Mr Sackar relies on three sources of extrinsic material to support his contention that s 40 was intended to apply to "claims made" policies. The first is the Discussion Paper of the Law Reform Commission[32] which raised for consideration some of the issues then thought to require reform in the law relating to insurance contracts. The second is the Commission's subsequent Report on "Insurance Contracts"[33], to which was attached a draft bill containing an explanatory note to cl 41 which, subject to one change not presently relevant[34], was later enacted as s 40 of the Act[35]. The third is the Explanatory Memorandum to the Insurance Contracts Bill 1984.
It is unnecessary to set out the terms of this extrinsic material. In my view, the three sources of extrinsic material strongly support the Council's contention that s 40 was intended to apply to "claims made" policies. First, the discussion in the material is in terms of "claims made" policies. There is no reference to "claims made and notified" policies. Second, the material indicates no policy reason why "claims made" policies should be treated differently from "claims made and notified" policies. It is not easy to see any reason why the Commission would seek to reform this branch of the law by dealing only with "claims made and notified" policies and not "claims made" policies. The extrinsic material wholly supports the Council's suggested interpretation of s 40.
GIO argues that the Law Reform Commission or draftsperson may have believed that a "claims made and notified" policy would soon cover the field of liability insurance and that s 40 should be drafted accordingly. However, there is no evidence to support such a proposition. All the indications are that the Commission and the Parliament would have wished to give "claims made" policies the protection that s 40(3) is said to give to "claims made and notified" policies. The question remains, however, as to whether this extrinsic material and the apparent intention of those responsible for s 40 enables a court to hold as a matter of construction that "claims made policies" are covered by that section.
The circumstances in which recourse can legitimately be had to the extrinsic material
Mr Sackar relied on s 15AB of the Acts Interpretation Act to urge this Court to examine and take into account the extrinsic material. Section 15AB is entitled "Use of extrinsic material in the interpretation of an Act" and relevantly provides:
"(1)Subject to subsection (3), in the interpretation of a provision of an Act, if any material not forming part of the Act is capable of assisting in the ascertainment of the meaning of the provision, consideration may be given to that material:Section 15AB permits a liberal use of many forms of extrinsic material. But the section has its limits. Recourse to extrinsic material under s 15AB is legitimate only if s 40 of the Act is "ambiguous or obscure", for it cannot be said that the ordinary meaning conveyed by the text of that section "is manifestly absurd or is unreasonable." Moreover, under s 15AB the ambiguity must arise from the words themselves before recourse to the extrinsic material is permitted, and the literal meaning of s 40(1) is neither ambiguous nor obscure. Section 15AB therefore does not assist the Council in its endeavour to use the extrinsic material to shape the meaning of s 40. Nothing in that section gives any support to the notion that the extrinsic material to which it refers can be used to demonstrate ambiguity in the legislative provision.
(a) to confirm that the meaning of the provision is the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act; or
(b) to determine the meaning of the provision when:
(i) the provision is ambiguous or obscure; or
(ii) the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act leads to a result that is manifestly absurd or is unreasonable.
(2)Without limiting the generality of subsection (1), the material that may be considered in accordance with that subsection in the interpretation of a provision of an Act includes:
...
(b) any relevant report of a Royal Commission, Law Reform Commission, committee of inquiry or other similar body that was laid before either House of the Parliament before the time when the provision was enacted;
...
(e) any explanatory memorandum relating to the Bill containing the provision ...
...
(3) In determining whether consideration should be given to any material in accordance with subsection (1), or in considering the weight to be given to any such material, regard shall be had, in addition to any other relevant matters, to:
(a) the desirability of persons being able to rely on the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act; and
(b) the need to avoid prolonging legal or other proceedings without compensating advantage."
However, rejecting Mr Sackar's submission on s 15AB does not preclude reliance on the three sources of extrinsic material. First, the appeal was conducted by both parties on the basis that relevant extrinsic material could be considered. Indeed, GIO relies on passages in the extrinsic material to demonstrate that "claims made" policies were clearly recognised at the time of drafting s 40 and to rebut any suggestion that such policies would not have been known to the draftsperson. The second, and more important, reason is that, independently of s 15AB, the modern approach to statutory interpretation permits recourse to the extrinsic material in the present case.
In construing a provision such as s 40, a court is permitted to have regard to the words used by the legislature in their legal and historical context and, in appropriate cases, to give them a meaning that will give effect to any purpose of the legislation that can be deduced from that context. The context includes reference to the provision's legislative history and the relevant reports of law reform bodies which detail the perceived evil requiring reform. As Brennan CJ, Dawson, Toohey and Gummow JJ pointed out in CIC Insurance Ltd v Bankstown Football Club Ltd[36]:
"It is well settled that at common law, apart from any reliance upon s 15AB of the Acts Interpretation Act 1901 (Cth), the court may have regard to reports of law reform bodies to ascertain the mischief which a statute is intended to cure. Moreover, the modern approach to statutory interpretation (a) insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise, and (b) uses 'context' in its widest sense to include such things as the existing state of the law and the mischief which, by legitimate means such as those just mentioned, one may discern the statute was intended to remedy." (references omitted)
In construing s 40 in the present case, therefore, it is proper to have recourse to the relevant extrinsic material.
The effect of the extrinsic material
Having identified the relevant extrinsic material and determined that it may be considered, the final question is, can the Court legitimately interpret s 40 to cover the policy in question in the present appeals?
Extrinsic material cannot be used to construe a legislative provision unless the construction of the provision suggested by that material is one that is "reasonably open"[37]. Even if extrinsic material convincingly indicates the evil at which a section was aimed, it does not follow that the language of the section will always permit a construction that will remedy that evil. If the legislature uses language which covers only one state of affairs, a court cannot legitimately construe the words of the section in a tortured and unrealistic manner to cover another set of circumstances. As Brennan CJ and I said in IW v City of Perth[38], even when a court adopts a purposive construction to remedial legislation it "is not at liberty to give it a construction that is unreasonable or unnatural."
Nevertheless, when the purpose of a legislative provision is clear, a court may be justified in giving the provision "a strained construction"[39] to achieve that purpose provided that the construction is neither unreasonable nor unnatural. If the target of a legislative provision is clear, the court's duty is to ensure that it is hit rather than to record that it has been missed[40]. As a result, on rare occasions a court may be justified in treating a provision as containing additional words if those additional words will give effect to the legislative purpose. In Jones v Wrotham Park Estates[41], Lord Diplock said that three conditions must be met before a court can read words into legislation. First, the court must know the mischief with which the statute was dealing. Second, the court must be satisfied that by inadvertence Parliament had overlooked an eventuality which must be dealt with if the purpose of the legislation is to be achieved. Third, the court must be able to state with certainty what words Parliament would have used to overcome the omission if its attention had been drawn to the defect.
The "effect" of the absence of a claim
The most powerful argument against applying s 40(1) to a "claims made" policy is that the literal meaning of the sub-section is strongly against it. On its face, the sub-section appears to be dealing with contracts of liability insurance that exclude or reduce liability for the sole reason that the insured has not given notice to the insurer of an existing claim before the period of insurance has come to an end. The phrase "by reason that" in s 40(1) suggests that s 40 applies only when the insurer's liability is excluded "by reason that notice of a claim ... is not given to the insurer" before the expiration of the period of cover. The phrase "by reason that" ordinarily suggests a direct and specific causal connection between two things, as in the phrase "the ship sunk by reason that it was overloaded". It is ordinarily synonymous with the term "because". On that reading of the phrase, a "claims made" policy, such as the present policy, is outside the scope of the sub-section because the exclusion from liability does not arise "by reason that notice of a claim" was not given. It arises because no claim was made during the relevant period of the contract of insurance.
However, this literal reading of s 40(1) is difficult to reconcile with both the words of s 40(3) and the mischief which the section is designed to overcome. The cause of the difficulty is that s 40(1) appears to make the failure to give notice of a claim the event which calls for the s 40(3) remedy while the event which s 40(3) remedies is the failure to make a claim on the insured during the period of insurance cover. To give effect to the purpose of the section as well as the language of s 40(3), the apparent conflict between s 40(1) and s 40(3) is best reconciled by treating s 40(1) as being concerned with cases where a claim against the insured was not made during the period of insurance and which therefore has resulted in notice of the claim not being given to the insurer during the period. On that construction, despite the literal meaning of s 40(1), both sub-ss (1) and (3) are directed to cases of claims being received outside the period of insurance. That construction accords with the evident intention of the framers of s 40.
The purpose of s 40(3) is to reduce the occasions where an insured will lose its indemnity by reason of a claim being made against it after the period of insurance has expired. As long as the insured has given the insurer written notice of a potential claim before the period expired, s 40(3) ensures that the fact that the claim is made after the expiration of the cover will not prevent recovery from the insurer. If s 40(1) is given a literal reading, however, a claims made policy would never come within s 40 even though it is the paradigm example of a policy that s 40(3) was intended to protect.
Moreover, if s 40(1) is given its literal meaning, so that "claims made" policies do not get the protection of s 40(3) then, as GIO maintains, "claims made and notified" policies must have been intended as the chief beneficiaries of s 40. That is a surprising conclusion because s 40 does not itself fully protect "claims made and notified" policies when no claim has been made during the period of the policy. Section 40(3) ensures that "the insurer is not relieved of liability ... in respect of the claim, when made, by reason only that it was made after the expiration of the period of insurance cover". It does not deal with the insurer's liability in respect of a policy which provides that the insurer must be notified of a claim during the period of cover. Thus, when a claim is made after the period of insurance has expired, a "claims made and notified" policy receives only partial protection from s 40. Section 40(3) ensures that the insurer under a "claims made and notified policy" is not relieved from liability because the claim was made after the policy expired. But the sub-section does not provide for the insurer to remain liable when it is a condition of the policy that a claim must be both made and notified during the period of cover. The insured must look elsewhere to find assistance in overcoming the failure to provide notification within the period of cover of any claim made against it.
On the present state of the authorities, that assistance is provided by s 54 which, broadly speaking, states that where the insurer may refuse to pay a claim by reason of some act or omission of the insured, the insurer may not refuse to pay the claim by reason only of that act, but its liability in respect of the claim is reduced to reflect the prejudice to its interests. East End Real Estate Pty Ltd v CE Heath Casualty & General Insurance Ltd[42] holds that s 54 relieves the insured under a "claims made and notified" policy from the consequences of a failure to notify the insurer of a claim made during the period of cover[43]. It is unnecessary for the purpose of this case to determine whether East End Real Estate and similar cases on s 54 are correctly decided[44]. But if they are not, the Act will not protect insured persons under either a "claims made" or "claims made and notified" policy when a claim is made after the expiration of the period of insurance.
In any event, given the less than complete protection which s 40(3) provides for "claims made and notified" policies, it is difficult to conclude that s 40 was primarily directed to such policies, as the argument for GIO maintained. If that was the principal object of the section, s 40(3) would surely have dealt with the notification aspect as well as the fact of the claim being made after the expiration of the period of the policy.
Add to the above considerations the fact that all discussion in the extrinsic material appears to be primarily directed to "claims made" policies and the case for rejecting a reading of s 40(1) which excludes "claims made" policies becomes overwhelming.
Lord Diplock's test applies
In my opinion, each of the three conditions to which Lord Diplock referred in Jones[45] is satisfied in this case. First, s 40(3) and the extrinsic material show that the mischief with which the section is dealing is the inapplicability of an indemnity provision by reason only of a claim being made after the period of cover has expired. Second, both s 40(3) and the extrinsic material show that by inadvertence Parliament has used language in enacting s 40(1) which read literally does not apply to some policies concerned with claims made outside the period of cover but which must have been intended to apply to them if the purpose of the Act is to be achieved. Third, if Parliament had had this defect drawn to its attention, it would have overcome it by adding at the end of s 40(1) the words "because no claim was made against the insured before that period expired". Section 40(1) would then read:
"(1)This section applies in relation to a contract of liability insurance the effect of which is that the insurer's liability is excluded or limited by reason that notice of a claim against the insured in respect of a loss suffered by some other person is not given to the insurer before the expiration of the period of the insurance cover provided by the contract because no claim was made against the insured before that period expired."
Section 40(3)
GIO points out that s 40(3) provides that "the insurer is not relieved of liability under the contract in respect of the claim, when made, by reason only that it was made after the expiration of the period of the insurance cover" (emphasis added). GIO contends that these words indicate that s 40(3) is predicated on the existence of a liability in the insurer and that, because it did not otherwise have any liability under the policy in question in this case, s 40(3) does not assist the Council. However, the purpose of the sub-section is to extend the liability of an insurer to claims made outside the period of cover where, during that period, the insured has given notice of facts giving rise to a potential claim. That being so, the sub-section must be taken to include cases where, but for s 40(3), the insurer would have no liability. That is to say, where it applies, s 40(3) protects claims made outside the period of cover.
In this case, the effect of the sub-section is that the claims made after 31 December 1991 do not lose their protection under the policy because they were not made during the currency of the policy. Before the expiration of the period of insurance, GIO was notified of "facts that might give rise to a claim against the insured". Section 40(3) therefore prevents GIO from relying on the fact that the claims were made after the policy had expired.
The appropriate order
The appeal should be allowed. I agree with Brennan CJ and Toohey, Gaudron and Gummow JJ that the question of the width of the orders made by Bainton J should be remitted to the New South Wales Court of Appeal.
FOOTNOTES:
[1] Condition 3.
[2] Section 11(7) reads:
"For the purposes of this Act, a contract of liability insurance is a contract of general insurance that provides insurance cover in respect of the insured's liability for loss or damage caused to a person who is not the insured."
[3] "a contract ... the effect of which is".
[4] "This section applies in relation to a contract ...".
[5] Paragraph 127 merely reproduces the content of sub-ss (1) and (3); par 128 the content of sub-s (2).
[6] (1981) 147 CLR 297 at 320.
[7] GIO General Ltd v Newcastle City Council (1996) 38 NSWLR 558.
[8] The decision of O'Keefe CJ at Comm D is reported as Newcastle City Council v GIO General Ltd t/a GIO Australia (1994) 8 ANZ Insurance Cases [partialdiff]61-227, and that of Bainton J as Newcastle City Council v GIO General Ltd (1995) 8 ANZ Insurance Cases [partialdiff]61-249.
[9] Examples were considered by this Court in Halford v Price (1960) 105 CLR 23 at 26 and Yorkville Nominees Pty Ltd v Lissenden (1986) 160 CLR 475 at 479-481; and by Needham J in Herron v McMahon (1984) 3 ANZ Insurance Cases [partialdiff]60-568 at 78,421.
[10] Derrington and Ashton, The Law of Liability Insurance, (1990) at 285-286.
[11] The Law Reform Commission, Insurance Contracts, Report No 20 (1982) at par 265. See, for example, FAI General Insurance Co v Perry (1993) 30 NSWLR 89 at 91; Thorman v New Hampshire Insurance Co and Home Insurance Co [1988] 1 Lloyd's Rep 7 at 9.
[12] The "Vainqueur JosÈ" [1979] 1 Lloyd's Rep 557 at 565; Pioneer Concrete v Employers Mutual Insurance [1985] 2 All ER 395 at 400; Clarke, The Law of Insurance Contracts, 2nd ed (1994) at 408-409, 684.
[13] Before amendment by s 6 of the Schedule to the Insurance Laws Amendment Act (No 2) 1994 (Cth), this read "$5,000".
[14] See CIC Insurance Limited v Bankstown Football Club Ltd (1997) 71 ALJR 312 at 324; 141 ALR 618 at 634-635.
[15] Reference also may be made to the Report under the common law independently of the Interpretation Act.
[16] cf Brennan v Comcare (1994) 50 FCR 555 at 573; 122 ALR 615 at 634-635.
[17] Counsel referred to cases considering the terms of "claims made and notified" policies including East End Real Estate v C E Heath Casualty & General Insurance (1991) 25 NSWLR 400; Breville Appliances Pty Ltd v Ducrou (1992) 7 ANZ Insurance Cases [partialdiff]61-125; FAI General Insurance Co v Perry (1993) 30 NSWLR 89; Moon v Bomba (1992) 7 ANZ Insurance Cases [partialdiff]61-150; Drayton v Martin (1996) 67 FCR 1; 137 ALR 145; Junemill Ltd (in liq) v FAI General Insurance Company Ltd (1996) 9 ANZ Insurance Cases [partialdiff]61-315.
[18] On an appeal to the High Court under s 73 of the Constitution from a decision of a State court exercising State jurisdiction the High Court has no power to receive fresh evidence: Mickelberg v The Queen (1989) 167 CLR 259. However, this would not exclude material relevant to an understanding of the context in which the statute was enacted.
[19] Isherwood v Butler Pollnow Pty Ltd (1986) 6 NSWLR 363 at 388.
[20] cf Dedousis v Water Board (1994) 181 CLR 171 at 177.
[21] cf East End Real Estate v C E Heath Casualty & General Insurance (1991) 25 NSWLR 400 at 403-404.
[22] Waugh v Kippen (1986) 160 CLR 156 at 164-165.
[23] Prior to the enactment of the Schedule to Insurance Laws Amendment Act (No 2) 1994 (Cth), s 6, the penalty was $5,000.
[24] Newcastle City Council v GIO General Ltd t/as GIO Australia (1994) 8 ANZ Ins Cas 61-227.
[25] Newcastle City Council (1994) 8 ANZ Ins Cas 61-227 at 75,493.
[26] Newcastle City Council v GIO General Ltd (1995) 8 ANZ Ins Cas 61-249.
[27] Newcastle City Council (1995) 8 ANZ Ins Cas 61-249 at 75,796.
[28] GIO General Ltd v Newcastle City Council (1996) 38 NSWLR 558.
[29] (1994) 181 CLR 171.
[30] (1987) 11 NSWLR 404 at 423.
[31] (1986) 160 CLR 156 at 164-165.
[32] The Law Reform Commission, Insurance Contracts, Discussion Paper No 7 (1978).
[33] The Law Reform Commission, Insurance Contracts, Report No 20 (1982).
[34] Section 40(2)(b) departed from the text of cl 41(2)(b) of the draft Bill by concluding with the words "clearly inform the insured in writing that the contract does not provide such cover", rather than "clearly inform the insured in writing that the insured may be able to obtain such cover under another contract with the insurer or with some other insurer".
[35] The Law Reform Commission, Insurance Contracts, Report No 20 (1982) at 287.
[36] (1997) 187 CLR 384 at 408. See also Saraswati v The Queen (1991) 172 CLR 1 at 21-23; Schott Musik International GMBH & Co v Colossal Records of Australia Pty Ltd (1997) 38 IPR 1 at 6 per Hill J.
[37] CIC Insurance Ltd (1997) 187 CLR 384 at 408.
[38] (1997) 71 ALJR 943 at 947; 146 ALR 696 at 702.
[39] Kingston (1987) 11 NSWLR 404 at 422; Sutherland Publishing Co Ltd v Caxton Publishing Co Ltd [1938] Ch 174 at 201.
[40] Kingston (1987) 11 NSWLR 404 at 424 citing Lord Diplock in "The Courts As Legislators", The Lawyer and Justice, (1978) at 274.
[41] [1980] AC 74 at 105; Kingston (1987) 11 NSWLR 404 at 422-423.
[42] (1991) 25 NSWLR 400.
[43] See also Breville Appliances Pty Ltd v Ducrou (1992) 7 ANZ Ins Cas 61-125 at 77,628.
[44] On 10 April 1992, however, this Court refused an application for special leave to appeal from the decision of the New South Wales Court of Appeal in East End Real Estate.
[45] [1980] AC 74 at 105.